Site Search Navigation

Site Navigation

Site Mobile Navigation

Analysis: Energy Lien Is Little Threat to Loan Giants

By Todd Woody July 2, 2010 12:11 pmJuly 2, 2010 12:11 pm

In an article in The Times on Thursday, I explained how Fannie Mae and Freddie Mac, the government-chartered mortgage giants, have derailed an innovate financing program that lets homeowners pay for expensive solar panels and energy efficiency upgrades over time through an annual surcharge on their property tax bills.

The program is called Property Assessed Clean Energy, or PACE, and it has been authorized by 22 states since 2008. The energy improvement assessments are secured by a lien on the home, but the agencies, which hold more than half of mortgages in the United States, recently sent letters to lenders warning them that such liens could not take priority over a mortgage. Fannie and Freddie worry that if a homeowner defaults, taxpayers will be left in the lurch, as property taxes generally are paid before mortgages are.

Putting aside whether such liens are any different from the property tax assessments commonly used to finance municipal improvements, how big a potential liability would Fannie and Freddie face?

Not very big, according to an analysis by the California attorney general’s office.

In a June 22 letter to the Federal Housing Finance Agency, which oversees Fannie and Freddie, Ken Alex, a senior assistant attorney general, cited the example of a homeowner who obtains $15,000 in financing from a PACE program to pay for a solar array and energy efficiency upgrades.

With a 7 percent interest rate and a 20-year payback term, the annual assessment on the homeowner’s property tax bill would be about $1,500.

“At the time of foreclosure for failing to pay the mortgage, it is likely that at most, one PACE assessment of $1,500 would have achieved priority lien status,” Mr. Alex wrote.

“This exercise suggests that with a portfolio of Fannie/Freddie mortgages that have PACE liens, assuming a high foreclosure rate of 10 percent, PACE seniority would average $150 per home,” he added. “Using a more reasonable foreclosure rate of 5 percent, average PACE seniority per home would be a mere $75.”

That scenario applies to California, where under state law a new owner would assume responsibility to pay ongoing tax assessments.

As I wrote in the article, some lenders have responded to the Fannie and Freddie letters by requiring homeowners to pay off the entire assessment before they issue a new loan or refinance a mortgage.

The uncertainty created by the Fannie and Freddie letters has prompted local governments to suspend most PACE programs until the agencies clarify whether an energy lien violates a mortgage.

7:02 p.m. | Updated

On Friday, Representative Henry A. Waxman, chairman of the House Committee on Energy and Commerce, and Representative Barney Frank, chairman of the House Committee on Financial Services, sent a letter to top Obama administration officials urging them to act quickly on the issue.

“It is our hope that your offices can quickly identify, agree on and publish guidelines that would allow PACE financing programs to continue while ensuring that both taxpayer and private mortgage investments are protected,” they wrote in a letter to Treasury Secretary Timothy F. Geithner, Energy Secretary Steven Chu and Edward DeMarco, the acting director of the Federal Housing Finance Agency.

“In the meantime, we ask that homeowners participating in the pioneering PACE programs already in operation be immediately assured that they are not in violation of their loans.”

What's Next

About

How are climate change, scarcer resources, population growth and other challenges reshaping society? From science to business to politics to living, our reporters track the high-stakes pursuit of a greener globe in a dialogue with experts and readers.